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C RO S S - B O R D E R I N S O LV E N C Y

Chapter 8

PEOPLES REPUBLIC
OF CHINA

1. Under general law


Cross-border insolvency procedures to be executed in China shall generally comply
with a number of general principles. Under the Constitution of the Peoples Republic
of China, Articles 18 and 32, any foreign enterprise, economic organization and
individual shall abide by the Chinese laws, and their lawful rights and interests shall
be protected under Chinese laws and jurisdiction.
Chinese laws recognize international conventions and bilateral or multilateral treaties.
China may offer or provide judicial assistance and cooperation to those countries that
have participated in the conventions and treaties based on reciprocity.
On Chinas accession to the WTO, China confirmed its commitments to follow its
international treaties, perform its obligations and duties and implement the WTO
Agreement by amending its current laws or making new laws and regulations. It will
also establish, for administrative acts, a judicial review procedure in conformity with
the WTO Agreement. China will adopt a more open attitude towards international
cooperation and this will influence the laws and practice of cross-border insolvency.

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Chinas general attitude towards recognition and enforcement of foreign court
judgments is:

based on international treaties and bilateral agreements joined by China or on


reciprocity, Chinese courts may, presuming that it will not impair the sovereignty and
security nor jeopardize the social and public interest of China, recognize and
execute foreign court judgments.

Chinese courts may not recognize nor execute foreign court judgments and rulings
in those cases over which Chinese courts have jurisdiction.

after recognized or executed by Chinese courts, foreign court judgments and


rulings may have equal effect with the Chinese court decisions.

2. Assisting legislation
The Chinese bankruptcy law system is comparatively complicated. The system is
composed of the Bankruptcy Law for State Owned Enterprises, bankruptcy
procedures for non-state owned enterprises, bankruptcy policies made by the central
government and a series of local bankruptcy regulations. There have been no specific
stipulations for international insolvency. Cross-border insolvency may generally apply
the Civil Procedure Law and stipulations provided by the international treaties and
bilateral judicial assistance agreements joined in by China.
The Civil Procedure Law and relevant bilateral judicial assistance agreements have
made the following stipulations provided for the procedure of recognition and
execution of foreign court rulings.
Requests for recognition or enforcement of foreign court judgments may be lodged
with the Peoples Courts (Chinese courts) that have the jurisdiction. Enterprise
bankruptcy cases are administered by the Peoples Court in the domicile of the
debtor, determined by the location of the main business organization or office of the
debtor. If the debtor has neither business organization nor office, the Peoples Court
of the location of the debtors registration may administer the case.
Recognition or execution of foreign court rulings may be requested either by the
litigant or the foreign court in accordance with the international treaties, judicial
assistance agreements or reciprocity entered or joined in by both its home country
and China. Should there be not any international treaty or reciprocity agreement, the
foreign court may request assistance through diplomatic means.
The litigant may also file a request to an intermediate Peoples Court that has the
jurisdiction for recognition or enforcement of the foreign court judgment. Should there
be no international treaty, the litigant may bring an action to the Peoples Court that
has the jurisdiction.
After receiving the request, the Chinese court will review the request in accordance
with the international treaties or agreements entered or joined in by China and the
foreign country or on the basis of reciprocity. The review is only restricted to whether
the foreign court judgment is in conformity with Chinese legal provisions or with the

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terms and conditions for recognition and enforcement of foreign judgments confirmed
in the judicial assistance agreements. Matters regarding findings of facts and
application of law may not be reviewed.
Foreign court judgments may be recognized and executed by the Chinese courts if
the following conditions are met:

according to China law, the court that made the judgment shall have the jurisdiction
over the case;

according to the law of the country in which the judgment was made, the judgment
has become effective;

the lawful rights and interests of the litigants have been and are duly protected;
Chinese courts have already arrived at a legally effective judgment on a case with
the same litigants and the identical object of action; or the case is being heard by
the Chinese courts; or the Chinese courts have recognized the judgment of a court
of a third country and the judgment has become legally effective; and
the judgment is in conformity with the principles of Chinese law and does not impair
the Chinese sovereignty and security nor the Chinese social and public interest.

After reviewing, the court may decide to recognize the foreign court judgment and
issue an enforcement order; or decide to deny recognition.

3. Insolvency practice
In respect of a foreign bankruptcy declaration that has become legally effective, a
foreign administrator may need to take action in respect of bankruptcy property
situated in China. In the absence of any judicial assistance agreement between China
and the foreign country, the Chinese courts usual practice will permit the
administrator to bring an action directly to the Chinese courts provided the foreign
administrator and the insolvent accept the jurisdiction of Chinese courts. A foreign
creditor requesting to seize property situated in China may be allowed, after
negotiation and mediation, to realize his rights on his foreign debtors property in
China by way of share transfer.
In respect of recognition of foreign bankruptcy procedures, the Chinese courts have,
in some cases, recognized the validity of foreign bankruptcy procedures after
permitting the foreign receiver and the local government to negotiate. (Re bankruptcy
of the Nanyang Textile Trading Co., Ltd. (1983).
In some cases, however, the Chinese courts have refused to recognize the validity of
foreign receivers and had shown a strong tendency to protect the Chinese creditors in
dealing with the cases (Re Guangzhou Liwan Construction Co. Ltd. v. Euro-America
China Property Ltd. and Re Bankruptcy of the Shenzhen branch of the Bank of
Commerce and Credit International (BCCI) (1992).

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In recent years, the Chinese courts in some areas have begun to recognise the legal
effect of foreign bankruptcy procedures. For example, the Intermediate Peoples
Court in Fuoshan, Guangdong Province had made a civil order to recognize the legal
effect of a bankruptcy judgment made by Italian courts in November 2001. (Docket
No. 2000 (633) civil judgment).

4. Examples
On 10 January 1999, Guangdong International Trust and Investment Corp.(GITIC)
and its subsidiaries GITIC Shenzhen, Guangdong International Leasing Corp. and
Guangxin Enterprise Development Corp. petitioned the courts for bankruptcy. This is
the first bankruptcy case in China that involved a large number of foreign creditors.
Altogether 494 domestic and foreign creditors declared claims amounted to RMB46.7
billion, of which more than 80% were foreign liabilities from many countries including
the U.S, Japan, Switzerland, Germany, France, Spain and Hong Kong.
This case sought to protect foreign creditors in its procedure, in that:

a committee of creditors was set up comprising domestic and foreign creditors who
take turns to preside over creditors meetings;

should any foreign creditor object to the rights confirmed by the liquidating
committee, the court may review the ruling.
In a case relevant to GITIC, the Hong Kong courts recognized the legal effect of the
bankruptcy procedure of GITIC by the Hong Kong High Court judgment No. 15651
(1999). The judgment was made on the basis of that the bankruptcy procedure of
GITIC gave equitable treatment to all creditors.
On 28 February 2003, the GITIC bankruptcy procedure was determined after four
years. After hearing by the Supreme Court of Guangdong Province, the Guangzhou
Intermediate Court and the Shenzhen Intermediate Court, discharge rates for claims
of GITIC and its subsidiaries, Guangxin Enterprise Development Corp, Guangdong
International Leasing Corp. and GITIC Shenzhen were fixed respectively at 12.52%,
28%, 11.5% and 19.48%, which exceed the record discharge rate of 8% in China.

5. Proposed reforms
The latest draft of the New Bankruptcy Law prepared by the National Peoples
Congress in 2002 has for the first time provided for cross-border insolvency. The draft
is yet to be ratified by the Chinese legislature. It stipulates in Article 8

the liquidation, mediation and reorganization procedures commenced by the


Peoples Courts under this Law shall have legal effect over the property of the
debtors both inside and outside China.

the liquidation, mediation and reorganization procedures commenced outside the


Peoples Republic of China shall have legal effect over the property of debtors
situated in the territory of the Peoples Republic of China. The petitions of the
litigants for enforcement of such procedures in China shall be awarded by the
Peoples Courts for permission.

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the Peoples Courts will refuse permission in the following circumstances:


there is neither international agreements nor reciprocity between China and the
foreign country;
the foreign procedure acts contrary to Chinese social and public interests;
there is substantial difference between the substantive provisions of the
bankruptcy and other relevant laws of the foreign country and the Chinese
Bankruptcy Law, and such difference may possibly impair the interests of the
Chinese creditors.
other factors that the Peoples Courts hold to be taken into account.

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